By Suhani AdilabadkarThe street was not delighted by Britannia’s September quarter numbers, and the stock declined 5% after Q2 FY21 numbers came out. India’s favorite cookie maker posted decent results but at a slower growth rate than expected as lockdown restrictions eased and supply chain issues resolved.
Overall, Britannia, is going strong with its biscuit brands Good Day, Tiger, NutriChoice, Milk Bikis and Marie Gold, household names bought across all ages. It’s not only biscuits, we have grown up with bread, cakes, rusk, cheese and edible beverages, milk and yoghurt manufactured by this well known FMCG, currently with its presence in 60 countries across the globe. The stock has gained 66% from its 52-week low struck on 23rd March 2020.
Quick Takes:
Operating revenues stood at Rs. 3419 crore in Q2 FY21 rising 12% YoY, aided by domestic volume growth of 9%.
Operating profit stood at Rs. 675 crore growing 37% YoY with operating margin at 19.75% and PAT rising 23% YoY.
Britannia’s volume growth slumped from a high of 21.5% in June quarter to just 9% in September as pantry loading stopped and consumers are gradually moving back to out of home consumption alternatives. MD Varun Berry noted that it is impossible to forecast what is driving this uneven demand trend in the current circumstances.
Capex of Rs. 700 crore for setting up plants in Tamil Nadu, UP, Bihar and brown field expansion in Orissa and Ranjangaon.
New product portfolio is contributing about 4-4.5% of total revenues and non-biscuit revenues stand at 25% of total revenues.
September Quarter FY21 didn't live up to expectations after June
After a phenomenal 27% growth in June quarter, September had less bite, with operating revenues coming out at Rs. 3419 crore in Q2 FY21 compared to Rs. 3049 crore same period previous year, rising 12% YoY, aided by domestic volume growth of 9% (biscuits-8.5% and adjacencies -10.5%). Operating profit stood at Rs. 675 crore in September quarter FY21 against Rs. 592 crore corresponding quarter previous year, growing 37% YoY.
Operating margin stood at 19.75% in Q2 FY21 against 16.14% same period previous year driven by cost efficiencies, lower promotional spend and softening of key raw material cost. PAT for the quarter came out at Rs. 495 crore against Rs. 403 crore same period previous year rising 23% YoY. Commenting on Q2 FY21 results, Mr. Varun Berry, MD, Britannia Industries said: “Covid-19 has brought about a situation whereby we are witnessing tectonic shifts in economic growths & consumer behaviour across the world. While the Government ended the lockdown, it appears that it will take a while for the situation to normalize”.
Britannia got off to early start post lockdown
After dipping to its 52-week low on 23rd March, Britannia stock price touched 4000 levels by 20th July as phenomenal June quarter results enthused investors. After a dismal 2.5% revenue growth in March quarter FY20, Britannia reported 27% revenue growth, 118% jump in PAT and operating profit rising 82% YoY in June quarter FY21 stimulated by pantry loading and packaged food coming to everyone’s rescue amidst lockdown restrictions.
As small local players wrestled with liquidity and supply chain issues, Britannia was among the very few manufacturers that was first off the block to restart its production facilities, taking advantage of low competitive intensity. Consequently, its rusk and bread volumes, where local players usually rule the roost, jumped dramatically growing even faster than biscuits.
Coming to September quarter FY21, packaged food growth momentum seems to have slowed with the unlocking of Covid restrictions, supply chains issues being resolved and consumers diversifying their spend across non-essentials. Consequently, Britannia’s volume growth slumped from a high of 21.5% in June quarter to just 9% in the September quarter along with a fall in operating revenues as panic buying and pantry loading stopped and consumers gradually moving back to out of home consumption and home delivery online food service.
In addition to this, local players are back in business, increasing competitive intensity and making packaged food industry, a level playing field again.
Dealing With Unpredictable Consumer Behavior
Moving on to Britannia’s food basket in Q2 FY21, in bakery segment, profitability of bread improved significantly, aggressive growth of rusk continued, while cake did not grow well due to higher dependence on MT (modern trade) channel and transit channels such as railways. With respect to dairy segment, performance was mixed, with cheese in the driver’s seat rising in strong double digits while drinks portfolio was impacted by lower out of home consumption.
In Q2 FY21, the month of July reported double digit growth, which slowed down to low single digits in August. Momentum was back in high single digits in September. MD Varun Berry noted that it is impossible to forecast and figure out what is driving this uneven demand trend in the current circumstances. He said, “Consumer behavior is changing every day and we are incorporating this into our medium-term strategy, so that we don’t loose sight in this hugely confusing situation we face in this world today”.
Though management is back to the drawing board to formulate its medium-term strategy, analysts are concerned about further deceleration of growth rates in the coming quarters as the economy moves back to its normalized routine. Berry defended this, “We are in a situation where we do not know what is going to happen tomorrow, so it is a very, very uncertain circumstance that we are going through, but what we have seen in the past is that once you have built a base then you find ways of growing beyond that, so we might not see similar growth as we go forward. But obviously we will strive to grow over the base we would have created”.
The management is increasing its A&P spend, focusing on gaining market share, and ensuring that Britannia is not underleveraged v/s category growth and lastly striving profitable growth through its 5 strategic planks (innovation, cost focus, sustainability, adjacent business and distribution & marketing).
Amidst Covid uncertainty and unpredictable consumer behaviour, Britannia outlined growth drivers to maintain stable profitable growth. Known as an urban centric FMCG, the company’s rural market (30% revenues) driven by democratising of its premium products (low unit packs) is growing at a higher rate than urban regions, along with its strong hold in south. The hindi belt ( Rajasthan, UP, MP and Gujarat) has been growing between 1.4-1.7x in the past 3 years, and a new product portfolio is contributing about 4-4.5% of total revenues and non-biscuit revenues which were about 13-15% of revenues 10 years back, currently stand at 25% of total revenues.
The company has also laid out a robust capex plan, with one new plant in Tamil Nadu, its largest state in terms of sales, another one in UP, currently the second largest market and the third one in Bihar. In addition to this a brownfield expansion is also planned in Orissa and Ranjangaon facility in Maharashtra, altogether costing Rs. 700 crore in the next 2-3 years. According to management, growth is already baked into Britannia’s long-term plans.